Vulnerabilities that gave way to Arab Spring intact

Dubai, August 5, 2014

More than three years after the start of the Arab Spring, political transformations have disappointed the lofty expectations of the masses that took to the streets to demand bread, dignity and freedom, said a report.

The BofA Merrill Lynch Global Research, titled, ‘BofA Global Economic Weekly – The global capex crawl’ pointed out that while political gains have been scored in a number of countries, the revolutions have ushered in greater polarization through increased sectarian tensions, adaption of the old regimes, and radicalisation of various Islamist factions.

The economic, socio-demographic and political vulnerabilities that gave way to the Arab Spring are largely intact, according to the research.

Economic growth has downshifted since then, exacerbating labour market tensions amid demographic pressures, while increased budget deficits due to weak growth, political instability and disruption to energy supplies, public debt has increased rapidly, particularly in Jordan and Egypt.

Efforts to address macro imbalances have been mixed to date, with differing experiences in terms of fiscal consolidation and of replenishment of external buffers through mobilisation of external assistance. Policy space for deep structural reforms toward a more inclusive growth model has been constrained by more immediate political difficulties, it said.

To some extent, the weak macroeconomic performances should be largely anticipated. In a recent paper6, the IMF suggested that the Arab macro transition experiences are so far broadly comparable to that of other historical episodes of political instability.

The episodes were characterised by sharp deterioration in macroeconomic variables and a sluggish medium-term recovery. The sample included existing market-based economies that have witnessed large scale social unrest. Compared to this sample, the Arab Countries in Transition (ACTs include Egypt, Jordan, Libya, Morocco, Tunisia and Yemen) appear to exhibit generally greater fiscal and external vulnerabilities, partly due to their weaker starting base.

Despite political constraints, it is thus no surprise that almost all these countries had to reform energy subsidies, for some in part along with multilateral aid.

Blurred border lines

Potential tectonic shifts to the Middle East map featured prominently among the various downside tail risks to the regional economic outlook, said the research.

The territorial ambitions of the terrorist Islamic State group had already blurred the Syrian border with Iraq. However, other Middle Eastern external borders (de jure borders) have not come under pressure, in contrast with internal borders (de facto borders) which have come to reflect the sectarian and military divide on the ground within the various countries. This is most prominent in Iraq and Syria, and to some extent increasingly as well in Libya and Yemen, it said.

Iraq is a major flashpoint near term

The risk to existing colonial Sykes-Picot borders is most pronounced in Iraq, where the political process currently stands at a fork in the road, said the report.

The Kurdistan Regional Government (KRG) has continued to contemplate independence, while eying political gains. A political process breakdown could materially change its potential secession calculus and timeframe.

Libya faces increasingly grim situation

The escalation of the Libyan conflict is likely to pose material challenges to the political transition and to the resumption of exports from Eastern ports, which had been blockaded by separatist militias.

Diplomatic personnel have already been evacuated, and oil workers also could be evacuated if fighting spreads further.

Competing militias have kept the central government’s authority weak and have derailed efforts at post-conflict disarmament and stabilisation. Yemen is the another country where tentative political gains are at growing risk of being reversed by the resurgent Shia Houthi revolt in the North and unresolved secessionist aspirations in the South.

Iran nuclear standoff approaching decision point

The agreement between Iran and P5+1 countries to extend nuclear negotiations for four months until November 24 is positive, said the research.

The talks are to formally resume in early September, and the UN General Assembly on September 16 could be an occasion to judge whether visible progress can be displayed.

No room for complacency

Mena credits trade tight against a volatile regional macro-geopolitical backdrop, found the report.

The oil market implications of tail risks related to Iraqi oil production loss are likely much larger than those linked to Libyan or Yemeni production potentially at risk.

The external borders could well remain unchanged as local factions battle for power and the centre collapses. However, internecine struggles typically take time to resolve, raise contagion and spillover risks to neighbouring countries or oil markets, and weaken macro outcomes, it added. - TradeArabia News Service